Israel’s persistent building of Jewish homes on disputed land undermines the U.S.-backed attempt to write an Israeli-Palestinian peace draft this year and invites questions about Israel’s motives, Secretary of State Condoleezza Rice said Sunday.

Using exceptionally harsh language, the visiting U.S. envoy said Israel must understand the pall its actions cast over talks and on the confidence of the United States, European nations and others that Israel is bargaining in good faith. She said the Jewish state has apparently picked up the pace of housing expansion since President Bush inaugurated negotiations with a splashy summit at Annapolis, Md.

“We should be in a position of encouraging confidence, not undermining it. No party should be taking steps at this point that could prejudice the outcome of the negotiation,” Rice said following meetings with Palestinian officials in the West Bank.

She said Israeli actions are having a “negative effect” on the atmosphere for talks, and she stressed that the United States won’t regard any settlements Israel builds now as permanent Israeli territory.

Israel announced last week it would build 1,300 new housing units in east Jerusalem, which the Palestinians want as their future capital. The announcement brought to more than 3,000 the number of homes Israel has approved for construction in east Jerusalem and the West Bank since the renewal of peace talks late last year.

The Palestinians claim both areas, captured by Israel in the 1967 Mideast war, as part of a future independent state.

“I asked Dr. Rice for assistance for Israel to abide by its commitments towards settlements,” Palestinian President Mahmoud Abbas said, with Rice beside him. “We consider the settlements as the biggest obstacle for the political process,” and each time Israel issues new housing orders “it increases this difficulty,” Abbas said.

Abbas’ moderate West Bank government faces flagging public support for talks with Israel, although Israeli, Palestinian and U.S. leaders all say there is progress behind closed doors.

The settlement issue is a particular political liability for Abbas, as Palestinians literally lose ground under his leadership. Rice passed several Israeli settlement towns in the West Bank as she drove between Jerusalem and Ramallah, including one of the largest in east Jerusalem with more than 25,000 Jewish residents.

Palestinians temporarily called off peace talks earlier this year over a previous Israeli announcement of new homes in east Jerusalem.

Speaking to U.S. reporters in Jerusalem later in the day, Rice said she had seen no change in Israel’s position on settlement activity.

“I think the key is to work with the Israelis and make clear to the Israelis that this is a problem,” she said. “The problem is that since Annapolis there has been a certain ... level of activity that raises questions and they need to address that.”

She said European leaders with whom she had just met similarly thought that settlement construction had hurt negotiations.

“I think the issue here is to try and get back to a place that there’s some confidence that this is a not an effort in some way to dictate or to prejudge,” final borders between Israel and a future independent Palestinian state, Rice said.

Under the U.S.-backed “road map” peace plan, Israel has pledged to halt all settlement activity. But Israeli Prime Minister Ehud Olmert has said he would continue building in West Bank settlements that Israel expects to retain under a final peace agreement.

He also says the freeze does not apply to east Jerusalem, which Israel annexed after the 1967 war. The annexation has not been internationally recognized.

Israel and the Palestinians resumed peace talks last seven years of violence with the goal of resolving the most difficult issues in their 60-year conflict by the end of 2008, just before Bush leaves office.

The goal is ambitious but not out of reach, Rice said.

“I can’t say yes, absolutely they’ll get an agreement. Nobody can say that,” Rice told U.S. reporters later Sunday. “But the idea that they have no chance of getting an agreement by the end of the year I think is just not right.”

The Bush administration has sometimes looked the other way at provocative Israeli housing policy, and it even appeared to endorse some Jewish housing expansion under former Prime Minister Ariel Sharon. Rice was specific Sunday in saying that Israel has not lived up to its promises under the road map, adding that the Palestinians have not always lived up to their end of the bargain, either.

The U.S. diplomat said she had made her point to each of several senior Israeli officials she saw Sunday, including at a joint meeting with the senior Israeli and Palestinian negotiators. Olmert’s office declined to comment.